18 July 2013 Internal T.I. 2013-0482811I7 - Transitional Tax Provable in Bankruptcy

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: What is the amount provable as transitional tax in a bankruptcy?

Position: 1. If a company, carrying on business in Ontario, is adjudged bankrupt in a particular year, and ceases to have a permanent establishment at that time, the provable claim is the total amount of transitional tax ordinarily payable over five years, less any amount paid in respect of earlier years.
2. If a company, carrying on business in Ontario, is adjudged bankrupt in a particular year, and maintains a permanent establishment at that time, the provable claim is the amount of transitional tax due for that year, plus any unpaid amount in respect of earlier years. Transitional tax for years, subsequent to the year of bankruptcy, are payable pursuant to section 47 and subsection 48(1) of the Ontario Act.

Reasons: 1. Subsection 121(1) BIA.
2. Subparagraph 46(2)(b)(ii) Taxation Act, RSO.
3. Subsection 121(1) BIA.

July 18, 2013

Collections Directorate HEADQUARTERS
Operations Division Income Tax Rulings
Directorate
Attention: Art Weston Lindsay Frank
Insolvency Section (613) 960-7919

2013-048281

Transitional Tax Provable in Bankruptcy

We are replying to your inquiry concerning the amount of transitional tax that would constitute a provable claim against the estate of a bankrupt corporation.

Transitional tax is determined by the provisions contained in subdivision d of Division B – Corporate Income Tax – in particular, sections 46 to 53 of the Taxation Act, 2007, R.S.O. (the "Ontario Act"). Section 47 reads in part, "There shall be added in computing a specified corporation's tax … for a taxation year the amount of additional tax…" . The amount of additional tax payable is determined by the formula contained in subsection 48(1). The formula contains a fraction (A/B) which generally determines the amount of the liability.

A corporation must pay its transitional tax generally over a five-year period, beginning with the taxation year ending after December 31, 2008. This five-year period, for which the transitional tax is calculated, is referred to as the corporation's "amortization period", which is described in subsection 46(2). However, the Ontario Act contains a number of circumstances that shorten the amortization period. For instance, subparagraph 46(2)(b)(ii) provides that the amortization period ends immediately before a corporation ceases to have a permanent establishment ("PE") in Ontario for any reason other than an eligible amalgamation or eligible post-2008 winding-up of the corporation. When this is the case, any transitional tax not yet payable becomes due in that taxation year.

To recover transitional tax owed by a bankrupt corporation, the Minister is required to prove a claim against the bankrupt estate. Subsection 121(1) of the Bankruptcy and Insolvency Act ("BIA") defines a provable claim as a present or future debt or a liability, which a bankrupt owes at bankruptcy, or which a bankrupt may owe before the bankrupt's discharge, for any obligation incurred before bankruptcy.

Given the combined effect of the Ontario Act and the BIA, the amount provable as transitional tax in a bankruptcy is as follows:

1. If a company, carrying on business in Ontario, is adjudged bankrupt in a particular year, and ceases to have a PE at that time, the amortization period ends at that time, and the provable claim is the total amount of transitional tax ordinarily payable over the five years, less any amount paid in respect of earlier years.
2. If a company, carrying on business in Ontario, is adjudged bankrupt in a particular year, and maintains a PE, the provable claim is the transitional tax due for that year, plus any unpaid transitional tax in respect of earlier years.

Should you have any questions or require additional information, please do not hesitate to contact Lindsay Frank at the number provided above.

Yours truly,

Terry Young, CPA, CA
Manager, Administrative Law Section
International Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch